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Cisco Will Bring $67 Billion Home -- But Then What?

By Leo Sun - Feb 20, 2018 at 10:36AM

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Buybacks, dividends, and domestic acquisitions could transform the aging tech giant.

In response to the recently lowered corporate tax rates, Cisco (CSCO 0.53%) will bring $67 billion in foreign earnings back to the US during the third quarter. That's a huge move for Cisco, which finished last quarter with just $2.4 billion of its $73.7 billion in cash, cash equivalents, and investments deposited in the US.

But what does that mean for investors? Let's examine the three main things Cisco will likely do with its repatriated cash.

Cisco's offices.

Image source: Cisco.

Stock buybacks

Cisco plans to return about $44 billion of the total to shareholders via buybacks and dividends. During last quarter's conference call, Cisco announced a $25 billion increase to its current share buyback program, which boosts its remaining authorization to about $31 billion.

It plans to buy back that total within the next 18 to 24 months. That marks a significant acceleration from the $3.4 billion in shares it repurchased in fiscal 2017, and the $5.6 billion in shares it bought back during the first half of 2018.

$31 billion also accounts for nearly 14% of Cisco's market cap. Repurchasing that much stock would significantly reduce its forward multiples -- which (at $44) currently stand at 18 and 17 times its projected earnings for 2018 and 2019, respectively.

Dividend hikes

It's assumed that the remaining $13 billion of the estimated windfall will go toward Cisco's dividend, which it's hiked every year since 2012. It raised its payout by 14% to $0.33 per share earlier this month, which gives it a forward yield of about 3%.

Bags of cash.

Image source: Getty Images.

Cisco paid out $5.5 billion in dividends in fiscal 2017, and another $2.8 billion in the first half of 2018. This gives it a payout ratio of 59%.

By allocating billions more to its dividend, Cisco could theoretically boost its yield above 4% while maintaining a comparable (or even lower) payout ratio.

The combination of a lower forward P/E ratio and a higher yield could make Cisco a very appealing investment for conservative income investors.

Domestic acquisitions

In the past, Cisco's limited cash position in the US prevented it from making huge acquisitions, which would need to be funded with debt or stock. Nonetheless, Cisco acquired large American companies over the past two years, including Jasper Technologies for $1.4 billion, AppDynamics for $3.7 billion, and Broadsoft for $1.9 billion.

Two puzzle pieces symbolizing a merger.

Image source: Getty Images.

Yet Cisco shied away from larger takeovers in the US. For example, Arista Networks (ANET 1.26%) remains a thorn in Cisco's side due to the popularity of its cheaper switches for generic "white box" hardware.

Cisco repeatedly sued Arista to throttle its growth, but never tried to buy the $22 billion company. Juniper Networks (JNPR 1.18%), with a market cap of $10 billion, is another stubborn rival in its router and switch markets.

After spending $44 billion of its repatriated cash on buybacks and dividends, Cisco could spend the remaining $23 billion on domestic acquisitions. Acquiring Arista or Juniper would increase the scale of its routing and switching businesses, while widening its moat against Huawei, its top rival in both markets.

Cisco could also buy more cybersecurity businesses to bolster its growing security business. FireEye is often cited as an ideal takeover target for Cisco, since it has a market cap of just $3 billion and a "best in breed" reputation in threat detection solutions. Palo Alto Networks, a high-growth market leader in next-gen firewalls, could also be a smart buy -- but it has a much higher market cap of $15 billion.

The bottom line

Cisco investors clearly love the idea of the company repatriating its cash, and the stock has rallied about 15% this year against the S&P 500's 2% gain. But plenty of things could still go wrong -- Cisco could mis-time the buybacks or overpay for acquisitions, or higher dividends might fail to attract investors as interest rates rise.

But if Cisco plays its cards right, its stock could be an undervalued gem at current levels, and could offer investors a unique blend of value, income, and growth over the next few years.


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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$44.00 (0.53%) $0.23
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
$30.07 (1.18%) $0.35
Arista Networks, Inc. Stock Quote
Arista Networks, Inc.
$100.95 (1.26%) $1.26

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